WHEN IS TAX SIMPLIFICATION GOING TO HAPPEN?

I know I keep flogging this subject, but the complexity of the federal income tax is really getting ridiculous. Some recent commentary does an excellent job of quantifying the complexity and the harm that it causes.

A policy paper by David Keating for the National Taxpayers Union, released on April 18, 2011, provides some startling facts about the acceleration of federal tax code complexity. Here are some of the examples he provides:

The percentage of federal income tax returns signed by paid tax preparers increased from 38% in 1980 to over 58% in 2007;

The percentage of returns signed by a paid preparer or prepared through the use of a computer program increased from 66% in 1996 to 90% in 2009;

The average fee charged by H&R Block (the largest tax preparation firm in the country) increased from $27.36 in 1980 to $179.07 in 2011;

The instruction booklet for Form 1040 expanded from 52 pages in 1985 to 179 pages in 2010.

That last example is perhaps the most telling of all. The instruction booklet for Form 1040 was still “only” 84 pages as recently as 1995. The fact that it has more than doubled in length in 15 years, and more than tripled in length in 25 years, says a lot about how much more complex a typical federal income tax return has become. No wonder that nine out of ten tax returns are now prepared either by a paid preparer or with the use of a computer program.

By the way, remember what year Steve Forbes first ran for president on a “flat tax” platform? It was 1996. The Form 1040 instruction booklet that year was still only 84 pages. By the time Forbes ran for president again in 2000, that booklet was 117 pages, an expansion of almost 40% in just four years. From 2000 to 2010, it expanded by over 50%. Why wasn’t Forbes’ advocacy of tax simplification taken more seriously? Whether you agreed with the particulars of his proposal or not, it looks to me like he was ahead of the curve, and the country is now far worse off as a result of having not only ignored his message, but gone a mile a minute in the other direction for a decade and a half since then.

An item in the April 18, 2011, Wall Street Journal by Arthur B. Laffer, titled “The 30-Cent Tax Premium,” cited another statistic from that National Taxpayers Union paper to make the point that the costs of tax complexity cause significant economic harm to the country. That statistic is this: federal tax paperwork consumes an amount of time equivalent to about 3.82 million employees working 40-hour weeks 50 weeks a year, or more than “the number of workers at the five biggest employers among Fortune 500 companies – more than all of the workers at Wal-Mart Stores, United Parcel Service, International Business Machines, McDonalds, and Target combined!”

Imagine what would happen if instead of being occupied by tax paperwork, those 7.64 billion worker hours were expended providing goods or services that people want to buy. That’s what Mr. Laffer did, and he reached some very interesting conclusions. He says that if the present tax complexity were cut in half (in other words, if federal taxes only took up half of those 7.64 billion worker hours and the other half were used for something productive), long-term economic growth would increase by about one-half of one percent per year.

Imagine what would happen if instead of being occupied by tax paperwork, those 7.64 billion worker hours were expended providing goods or services that people want to buy. That’s what Mr. Laffer did, and he reached some very interesting conclusions. He says that if the present tax complexity were cut in half (in other words, if federal taxes only took up half of those 7.64 billion worker hours and the other half were used for something productive), long-term economic growth would increase by about one-half of one percent per year.

That may not sound like much, but according to Mr. Laffer, that increase would mean that a family making $40,000 in the year 2000 would have seen their income increase to $55,568 by 2010, whereas without that extra 0.5%, their 2010 income would have increased to $53,110. That’s putting real numbers to the cost of the ever-expanding complexity of federal taxes.

Another quantifier that Mr. Laffer puts on federal tax complexity is the cost of tax compliance. Tax compliance costs $431 billion annually. The effect of that expense is “a cost markup of 30 cents on every dollar paid in taxes,” hence the title of the article. So, for every $100 paid in taxes, there is an additional cost of $30 to do what it takes to pay the $100. Not exactly what you could call an efficient system, huh?

I could go on, but you get the point. The federal tax code is frankly, in my humble opinion, a disgrace. The change in recent years has been entirely in one direction, best exemplified by the Form 1040 booklet more than doubling in length in the last 15 years. No wonder the IRS won’t even mail it to taxpayers anymore.

We shall see if there is ever any serious effort by members of Congress to reverse the trend. Something’s gotta give.

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